A slow start to the trading week is starting to gain momentum with Fed Chair, Janet Yellen due to speak at the Economic Club of New York later today at 16:30 UK time. The speech titled, “Economic Outlook and Monetary Policy” is likely to garner a lot of attention after the dovish signals sent by the Federal Reserve at its meeting in March.
Between the March meeting and now, various Fed officials in the likes of Charles Evans, Dennis Lockhart among others have struck a similar tone, sounding optimistic on the US economy and staying hawkish on rate hikes from the Federal Reserve. One particular comment from San Francisco Federal Reserve President, John Williams stood out. He said that the Fed could raise rates as early as April. While the markets continue to price in two rate hikes in 2016, it is unlikely to expect the Fed move as early as April. Rather, the Fed could use April’s FOMC statement to prepare the markets for a possible rate hike in June keeping pace with the Fed’s “gradual pace of hikes” and to strike a balance between the domestic economic expansion while ensuring that the US Dollar doesn’t strengthen too rapidly.
Ms. Yellen’s speech is thus important to the markets in the above context, but chances are high that an accommodative tone is likely to come up in the language being used at today’s event.
Markets look to Q1 – 2016 data
While last week saw a surprise revision to the US fourth quarter GDP for the third time in a row to 1.40%, the Dollar’s reaction was mostly muted. With the first quarter of 2016 almost coming to a close, the markets will shift focus to how the US economy has performed under the 25bps rate hike in December. Yesterday, the US trade and investment data released showed that the US trade deficit widened to 0.70% in February, to a seasonally adjusted $62.86 billion with the advanced goods data showing that US exports increased 2.0% while imports increased 1.60% in the month. Following the data, many financial establishments tracking the markets lowered the Q1 2016 GDP to an average of 1.20 – 0.60% while the Atlanta Fed’s GDPNow model forecasts 0.60% after the trade data, down from 1.40% as of March 24th.
Monday’s PCE data was soft with an increase of 0.10% on a month over month basis, in a sharp contrast to 0.30% increase seen in January Personal Spending also grew at a slower pace of 0.10% for the month with previous month’s data seeing a strong downward revision from 0.50% to 0.10%. The Fed acknowledged with some members concerned about the lack of inflation growth which has been consistent below the Federal Reserve’s mandated 2.0% inflation rate.
Following Janet Yellen’s speech today, Wednesday will see the ADP private payrolls followed up by Friday’s nonfarm payrolls.